The Nation 2012-6-8
Cairo has always had its slums, among them tidy neighborhoods like Shobra and Agouza, which were once middle-class but have been abandoned over time to the poor and homeless—the “Egypt of rags and sores,” as novelist Lawrence Durrell put it. Over the past decade, however, a new and more sinister species of urban blight has advanced along the city’s outskirts: great honeycombs of mostly uninhabited apartment blocks, products of a vast unregulated economy without permits and inspections or public services like paved streets, lighting, sewage systems and clean water. Many were built by speculators and abandoned in mid-construction. Colonies of squatters have moved in, announcing themselves by the lines of laundry that protrude through windows like flags of capitulation.

Pop-up slums are only a small part of Hosni Mubarak’s legacy, the ousted dictator’s revenge on a nation whose natural resources he plundered and whose markets he rigged for his family and corrupt hangers-on. Having throttled even peaceful opposition throughout his thirty-year rule, he bequeaths a nation at war with itself ahead of the second round of its first free presidential elections. A once-molten political landscape has hardened into a handful of rival camps defined less by issues than by identity and class: Muslim and Christian, religious and secular, haves and have-nots, liberal-minded and security-conscious. Unless the new president can form a broad coalition government to confront the challenges that lie ahead, Egyptians could see years of partisan gridlock, with occasional interludes of violence.

The first round of electioneering in May produced a runoff between the two most divisive candidates: Mohammed Morsi of the powerful Muslim Brotherhood, and the law-and-order Ahmed Shafik, a Mubarak crony. Both men are creatures of an ossified establishment incompatible with the revolution’s liberal ideals. Shafik is regarded as feloul, a remnant of the old regime who would drag Egypt back to the wrong side of history, while Morsi’s Brotherhood (Ikhwan in Arabic) is a secretive, hierarchical order that rewards obedience, punishes dissenters and thrives on the politics of identity. Once widely respected for its decades-long resistance to the old regime, the Ikhwan has antagonized even orthodox Muslims since Mubarak’s departure with a series of ham-fisted miscalculations. The group assured Egyptians it sought only a minority bloc in Parliament, then fielded enough candidates to control half the seats; it promised to protect the virtue of the revolution, then colluded with the illiberal military that runs the country; it prohibited its members from running for president, but changed its mind midway through the campaign, when progressive contenders like Abdel Moneim Aboul Fotouh, an Ikhwan renegade, began polling well with voters.

Despite this, both Morsi and Shafik were able to prevail among a diverse field of candidates by appealing to their respective bases: Islamists on the one side, and, on the other, voters who, in turbulent Egypt, would trade one part liberty for an equal share of security—that slippery slope to autocracy that Benjamin Franklin warned about. The recent torching of Shafik’s campaign headquarters, as well as the outraged response to the dismissal on June 2 of corruption charges against Mubarak’s sons and the acquittal of six security officials charged with murder, shows how quickly Egyptian democracy can turn violent. As The Nation went to press, Morsi had allied with Fotouh and third-place candidate Hamdeen Sabahi to demand that election officials enforce the parliamentary legislation that disqualified Shafik because of his connection to the old regime. (The elder Mubarak, meanwhile, was sentenced to life in prison for accepting bribes and ordering a lethal response to peaceful protests.)

“Things are tense, and it will remain so for some time,” said Mohammed Habib, a former senior leader of the Muslim Brotherhood. “Violence is possible. I am not optimistic.”

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After six decades of misrule—beginning with the wholesale nationalization of the Egyptian economy in the 1950s and ’60s by Gamal Abdel Nasser and the dispossession of minority groups, particularly the country’s Jewish merchant class—Egypt is broken and exhausted. The economy, which tumbled amid the uncertainty of Mubarak’s overthrow, has yet to achieve meaningful signs of recovery. The nation’s infrastructure is failing and there is no money, let alone a master plan, to rebuild it. The rate of tourist arrivals, the country’s most important source of hard currency, is at rock bottom, and the threat of a currency devaluation is keeping foreign investors at bay. Subsidies, some of them legacies of the Nasser era, are wasteful and biased toward industry at the expense of public goods and services. Banks choke on discarded government debt, even as small to midsize businesses—the backbone of the economy—are starved of capital.

Despite a free and fair legislative election in January and an imperfect but conclusive first-round presidential ballot in May, Egypt’s transition to civilian rule is far from certain. The government is administered by the Supreme Council of the Armed Forces, which has only tightened its grip on power since Mubarak’s toppling. The SCAF, already powerful economically with its lucrative share of the civilian economy, has marginalized rival agencies in the national security complex. Debate over the SCAF’s role in Egypt’s new democracy was all but absent before the first round of voting, and the generals are thought to have veto power over the soon-to-be-drafted Constitution.

“No one has tried to go after the deep state so far,” says Heba Morayef, the Cairo-based researcher for Human Rights Watch. “It used to be the State Security Investigations and the Mukhabarat at the center of power, with the military on the side. Now the military is doing everything. Whether you can peel that back is the big question.”

According to local human rights groups, security agents, with SCAF’s blessing, have been deployed to smother labor strikes, while conscripts man the production lines in army-owned factories. The military’s budget is cloaked in secrecy, as is its portfolio of commercial assets, which range from computer manufacturers to gas stations. (To coax the public into accepting proposed cuts in fuel subsidies, the SCAF is rumored to have engineered shortages of gasoline and delivery delays.) In December the military helped to replenish Egypt’s depleted treasury with a “loan” of $1 billion, a gesture that angered many Egyptians as brazen and cynical. Possibly as a hedge against a coup, it has also managed to top up the salaries of mid-ranking officers and enlisted men with generous monthly bonuses.

The SCAF’s main profit center is Egypt’s oil and gas sectors, which account for about 14 percent of economic output, and the ports and maritime authorities that process their exports. Through its holdings in Tharwa Petroleum, according to Shana Marshall and Joshua Stacher in the spring edition of Middle East Report, the military engages in energy exploration with several petroleum ventures involving Chinese and Italian firms. It also profits from Europe’s commercial links with China via enhanced traffic of Europe-bound Chinese goods through the Suez Canal Authority, which it administers.

In the past, competition for civilian assets from Egypt’s oligarchs kept the SCAF in check. Now, according to Marshall and Stacher, with so many Mubarak cronies under investigation or indicted in absentia, “the military is much freer to dictate its terms. With the power to determine the winners and losers at the commanding heights of Egypt’s capitalism, the SCAF will retain unchallengeable clout long after the formal return of civilian rule.”

The SCAF has a powerful advocate in Ahmed Shafik, a former air force general who is far more likely to collude with, rather than challenge, his former brother officers. (According to Egyptian press reports, junior officers in the security apparatus as well as civilian public servants were told by superiors to vote for Shafik, while military personnel, who are prohibited from voting, were told to mobilize their families on his behalf.) Brotherhood leaders have called for the military to declare the size of its budget, but they’ve also signaled that they must wait until the economy recovers before expending political capital in a fight with the SCAF.

“The army has always been the major power in Egypt,” says Nadeem Mansour, executive director of the Egyptian Center for Economic and Social Rights. “We need a long-term plan for asserting greater control over the military, but for now the most we can hope for is greater transparency.”

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Neither candidate is likely to repeal the economic policies that transformed the Egyptian economy during the last decade of Mubarak’s rule and, according to activists and some economists, set the stage for insurrection. In 2004, with Egypt laid low by a cash crunch similar to the one it faces today, the government responded by privatizing industry, deregulating the pound, lifting import tariffs, and cutting personal and corporate tax rates. By the end of the decade, the economy had achieved an average annual growth rate of about 6.5 percent and was lauded as a model of reform by doting supply-siders. But the dividends failed to percolate beyond a small circle of predatory elites. Egyptian banks, despite higher reserve requirements and improved balance sheets, declined to diversify away from their more lucrative clients—big corporations and the treasury—at the expense of family-run businesses aching for credit. The result was rising unemployment and inflation at a time of rapid growth. As of 2008, the number of Egyptians living below the poverty line accounted for 22 percent of the population, up from 17 percent in 2000. Add to that corruption associated with the sale of Egypt’s largest companies, together with the prospect of a dynastic transfer of power from Mubarak to his son Gamal—widely loathed as both the architect and benefactor of divestment—and a reckoning was unavoidable.

If there is common cause between Morsi and Shafik, it is in their embrace of the neoliberal policies that have proven so unpopular with voters. The Brotherhood, which in the event of a Morsi victory would control the executive and legislative wings of government as well as white-collar syndicates such as the teacher and medical associations, is famously pro–free market. Its all-powerful Number 2, deputy supreme guide Khairat El Shater, is a wealthy businessman and investor who has urged a new round of privatization, including the sale of public utilities. The Brotherhood also administers a vast network of charities and patronage systems, however, and its free-market faith is not unconditional: it opposes the country’s flat tax as regressive, embraces self-sufficiency in strategic commodities, and supports a minimum and maximum wage. In an interview, Shater told The Nation that the Ikhwan might even back government intervention to shore up the pound. “The free market has adapted over fifty years,” he said, “but not without state support.”

As the election enters its home stretch, Morsi would be wise to promote such a progressive agenda, given how well it served the leftist candidate Hamdeen Sabahi in his surprisingly strong showing in the first round. (Analysts contend that had Sabahi allied with Aboul Fotouh, the ex-Ikhwanist who finished fourth, they would have prevailed.)

Though recent indicators suggest that the economy has stabilized, the future is obscured by an overhang of sovereign debt assumed by local banks after panicked foreign investors dumped their holdings last year. In the year after Mubarak’s February 2011 overthrow, loans to the government held by Egyptian banks swelled to nearly two-thirds of total lending, an extraordinarily high ratio that crowds out lending to businesses and corporations. The banks are willing financiers, but only at yields of at least 16 percent, a price many economists regard as unsustainable. In October, Standard & Poor’s cut Egypt’s sovereign debt rating, and in May it downgraded four top banks, citing Cairo’s “reduced sovereign creditworthiness,” which “limits the government’s ability to provide extraordinary support to banks in the event of financial distress.” In other words, if the treasury defaults on its obligations, it may drag lenders down with it.

The country’s foreign exchange reserve has stabilized at about $15 billion, less than half the pre-revolution level, largely because foreigners have finally disposed of their Egyptian treasuries. While that has cheered some economists, others fear a devaluation of the pound. “It’s great that foreigners have finished selling Egyptian debt,” says a Cairo-based investor who requested anonymity, given the fragility of Egypt’s financial system. “But if you’re no longer breathing, it doesn’t mean you don’t need oxygen. It means you’re dying.”

The analyst conceded that a revival of foreign investment and the tourist trade is likely once the country stabilizes politically. “But then what happens?” he said. “The existing cash crunch will deepen and people will be forced to go to the black market for dollars and interest rates will rise. The government has a choice. It can either devalue the currency or do nothing and hope that things will slowly turn around. But that could end in a slow death.”

The good news, according to economists, is that the risk of default is minimal. Unlike the beleaguered banking sectors of Greece and Spain, which were undone by incendiary derivatives and bundled mortgages, Egyptian banks have contented themselves with basic loans and fixed-income deposits. Another factor working in Egypt’s favor is its enormous shadow economy. Only 10 percent of Egyptians have bank accounts, which means the majority of transactions go unreported. Despite the diminished reserves of hard currency, a nebula of informal business activity has kept the economy afloat through previous recessions, and it is likely to see the country through the current one.

Of course, this is hardly an unqualified blessing. As the Arab world’s largest market, Egypt should be a major financial center. Instead, it is burdened with some of the most risk-averse bankers in the region. According to Egyptian economist Tarek El Ghamrawy, credit for new investment is worth 3.5 percent of the total, compared with 12.8 percent for the Middle East/North Africa region. Only 4.2 percent of that amount is held by small businesses, which account for more than two-thirds of economic output. Shunned by the banks, business owners either borrow from family members or turn to independent lenders at usurious rates of interest.

Eluding the treasurer’s audit, the shadow economy represents billions of dollars of unrealized public revenue. It is where unregulated housing flourishes and where schoolteachers, to supplement their meager incomes, hold after-school “tutoring” sessions that students are all but obligated to attend. It hosts much of the “officer economy,” where indentured enlisted soldiers line kitchen appliances with insulation rather than develop skills for better jobs after their return to civilian life. In the shadow economy, supply bottlenecks can multiply the price of goods by a factor of four, and farmers are violently evicted from fertile land—an increasingly precious resource given Egypt’s diminishing water supply—at the pleasure of rich developers. In a country where anyone who works more than one hour a week is counted as employed, the shadow economy is home to an invisible mass of jobless Egyptians.

It is in the shadow economy that the nation’s enterprise and illegality cross-fertilize, and it is there that Egyptian democracy will succeed or fail. The outlook is not good. The appeal of candidates Morsi and Shafik, figureheads of modern Egypt’s two most powerful warring tribes, is confined to the severely religious and the profoundly frightened. So irreconcilable are their competing values that it’s hard to believe they would lock arms for the greater good. For generations the Ikhwan and Egypt’s dictators struggled against each other like matter and antimatter, only to resume their war in the china shop of the nation’s new order. Just as the Ikhwan distinguished itself by resisting Mubarak, so does Shafik owe his resurrection to the Brotherhood’s outsized and off-putting belief in its own entitlement—first over the syndicates, then Parliament and finally the president’s office. Shafik may lose the election, but his constituency, a tactical alliance of secularists, Christians and pious Muslims unnerved by the prospect of single-party rule, will survive him unless the Brotherhood ditches its parochial parapet for an ecumenical big tent. Otherwise, the prospect of another revolt—one driven more by the need for food than the desire for political emancipation—will intensify in lockstep with Egypt’s economic and social debility.

A decade ago, when he was a member of Parliament, Morsi spent a day with me in his home district in the Nile Delta. We met at the local university, where he lectured as a professor of engineering, and as we prepared to embark on his scheduled rounds, he lamented the dire mismatch between the demands of Egypt’s youth and the diminishing returns of its economy. At one point, he gestured to the students around him. “When these students graduate, where will they go?” he asked. “We have 200,000 graduates in the market, and there are no jobs.”